Eskom, SAA, SAPO and all the other state companies the South African government has run into the ground

Government’s track record with state-owned companies is nothing short of abysmal, with reports that nuclear energy regulator Necsa is the latest in a long line to fall prey to maladministration and financial collapse.

The massive problems at South Africa’s state-owned companies was highlighted by Auditor General, Kimi Makwetu, in November, where he noted that not a single audited SOE obtained a clean audit opinion in the last financial year.

These entities are under significant pressure he said, expressing doubt about whether some of them can even continue with their operations in future without financial assistance.

“There were weaknesses in the performance reporting processes and an increase in non-compliance at the 14 SOEs and their significant subsidiaries audited by the Auditor General South Africa (AGSA),” he said.

“These entities also disclosed R1.4 billion in irregular expenditure, although the amount could be even higher as four SOEs – Denel, the South African Broadcasting Corporation, South African Express Airways and the South African Forestry Company – were qualified on the completeness of their irregular expenditure disclosure.”

The irregular expenditure of the SOEs the AGSA did not audit amounted to R57 billion – which included R49.9 billion at Transnet and R6.6 billion at Eskom. The AG’s report indicates that the results of the audited SOEs continued to regress from the previous year.

With around 700 state-owned entities in South Africa, it is almost impossible tracking the failures and losses (or successes) at all of them but there have been a number of high-profile crashes – many of which South Africans are very familiar with.

Whether its government bailouts, continued losses, corruption or financial collapse, these are some of the biggest state companies that have been run into the ground.

Eskom – government bailouts

The most obvious and widely known state failure is Eskom – where the power utility’s operational and financial troubles have put the country’s economy at risk.

Eskom actively encourages its customers to not use its products and services, as too much demand places extreme pressure on its poorly maintained infrastructure, pushing the electricity provider to implement rolling blackouts to avoid a total collapse of the power grid.

Decreased demand, leads to decreased sales, which in turn leads to higher prices (up over 500% since 2007). However, the company is still unable to generate enough revenue to meet its maintenance needs or pay off its debt – which has ballooned to over R450 billion.

After posting a R2.3 billion loss last year, the group is expected to make R20 billion loss by the end of this year – the biggest loss any state company has ever seen – and despite plans by government to restructure the business, there is no end in sight for these financial woes.

Eskom has been marred by exceptionally poor governance, corruption, maladministration, cadre deployment, and has been at the heart of state capture in South Africa.

SAA – business rescue

South African Airways has not turned a profit since 2011, nor has it publicly presented its financial results for the past two years.

However, a leaked presentation of the group’s finances made its way to the press in the last week showing a R5.4 billion loss in the year ending March 2018, and an additional R5 billion loss in the year ending March 2019.

After years of government bailouts (R40 billion over the last 20 years), government finally admitted earlier in December that it has failed, placing the airline under urgent business rescue.

The airline’s turnaround plans have been met with failure – with government being unable to support it with fresh bailouts, and unions shutting down the already loss-making operations in a push-back against plans to try and cut costs.

Business rescue practitioners will be hard-pressed to turn the business into a profitable venture in one of the most competitive industries that already carry slim margins. For many, liquidation appears to be the only logical outcome.

Denel – government bailouts

State defence group Denel is another victim of state capture and maladministration under its previous management team.

The group is said to have lost over R30 billion in contracts because a former executive insisted that kickback contracts be signed with the Gupta family – while South African defence force IP has also reportedly been stolen from the group.

In June 2019,  the group ran out of money, and didn’t have enough cash to pay its staff their full salaries for the month, necessitating government intervention once again.

In its latest financial results, the group posted a net loss of R1.75 billion, extending the loss of over R1 billion from the year before. Revenue was down, cash reserves were down, borrowing was up and the company got a R1.8 billion bailout from government in August 2019 – with a possible R1 billion bailout still to come.

The company is trying to turn the business around, with management hopeful – especially if government bailouts are on the menu.

Prasa – under administration

Following swiftly after the fall of SAA, Prasa has been placed under administration after continued failure to meet financial and operational targets.

Acting group chief executive officer, Dr Nkosinathi Sishi painted a dismal picture of the group’s performance in a note posted in Prasa’s annual report for 2018/2019, saying that the group continues to offer a service that is poor, unreliable, unpredictable and that is not safe, thus resulting in the decline in customer and stakeholder confidence.

In the last eight years, Prasa has not been able to reach 60% of its performance targets. Only during the financial year 2015/16 did Prasa exceeded 50% of its pre-determined objectives by meeting 55% of its performance targets.

The organisation’s operating deficit (before loss on disposal of assets and fair value adjustments) had reached unacceptable levels at R1.8 billion in 2018/19.

The group has also been a victim of poor governance and maladministration, with the most notable blunder in recent years being the acquisition of trains to the value of R3.5 billion, which were not suitable for South African rails.

Sanral – government bailouts

The South African National Roads Agency’s biggest failure is the e-tolling system, which has single-handedly tanked the group’s finances, necessitating a “strategic intervention” by government earlier in the year to the tune of R5.7 billion.

The group reported a profit after finance costs of R2.42 billion for the year compared to the R418 million loss in the previous year – however it remains heavily in debt (which is mounting) related to the failed e-toll project, now six years old.

Because non-compliance to the scheme is low, the roads agency has been forced to turn to state coffers to cover the debt costs on the scheme – while also moving billions around its own books to cover the fees.

Of the R16.7 billion in revenue recorded in 2018/19, R7 billion is tied to non-toll related government grants.

SABC – technically insolvent

SABC Please Stand By Test Pattern

Government announced that the embattled South African Broadcasting Corporation (SABC) will receive a multi-billion rand lifeline in October 2019, where communications minister Stella Ndabeni-Abrahams said that government would transfer R2.1 billion to the broadcaster as part of a short-term turnaround plan.

She said that an additional R1.1 billion will be transferred once the national broadcaster meets a number of preconditions as set by the National Treasury.

The bailout comes after the SABC said that it was technically insolvent and is struggling to honour payments to service providers and contractual obligations.

In September SABC group CFO Yolande van Biljon said that the group’s financial position has worsened and that it ended the previous financial year with a cash balance of only R72 million.

“There are instances where we are unable to honour payments and even (unable) to adhere to committed contracts, which means we often need to renegotiate because we have been unable to meet the requirements.

“Currently, the organisation is technically insolvent. We are also under tremendous strain towards being factually insolvent as a result of our liquidity issues. Cash is depleted and the trade and other payables amount to R1.8 billion as at June 2019,” van Biljon said.

Necsa – business rescue warning

Nuclear power energy on wall

Nuclear energy regulator Necsa is the latest state-run company to face a”meltdown”, according to energy expert Chris Yellend, who reported that the group is unable to pay salaries in December unless its plea for R170 million in support is met by government.

If government does not respond within the next two weeks, the group may be forced into business rescue, Yellend said.

The group has continued to face financial problems over the years, having suffered cumulative losses of R258 million in the 2016/17 and 2017/18 financial years.

According to reports, the group is expected to announce an even greater loss of R294 million in 2018/19, resulting in cumulative losses over the three-year period of R552 million.

Yellend revealed that a letter in October from the current Necsa board to the Parliamentary Portfolio Committee on Minerals and Energy exposed the misuse of Necsa funds by the former board, further revealing that Necsa has been making massive operating losses since 2014.

SAPO – government bailouts

In November, parliament heard that the South African Post Office (SAPO) has not been profitable over the last 13 years except in 2006 when it made a profit of R276 million.

As reported by the Parliamentary Monitoring Group, earlier this year, the Post Office received a R1.5 billion “public service mandate” or grant from National Treasury.

Long-serving committee members said that they had been listening to board after board and CEO after CEO insisting that they would turn around the Post Office year after year with just an additional R1 billion or R2 billion.

They had been told that the post office would have turned a profit by 2020, but the CFO had now told them it will not.

CEF and Petro SA – losses

The Petroleum Oil and Gas Corporation of South Africa (PetroSA) is the national oil company of South Africa and is registered as a commercial entity under South African law.

PetroSA is a subsidiary of the Central Energy Fund (CEF), which is wholly owned by the state and reports to the Department of Mineral Resources and Energy. The CEF, too, is facing its own financial difficulties, reporting a net loss of R470 million for 2018/19.

According to its latest financial report, Petro SA posted a net loss of R2.08 billion (2017/18: R392 million loss) for the 2018/19 financial year. Although the group EBITDA was R639 million compared to R443 million the previous year, the group operating loss was R1.28 billion (2017/18: R800 million) due to Impairment charges.

Before impairment, the loss amounted to R126 million (2017/18: R540 million operating loss).

Problems at the CEF include large financial losses, in-fighting at board level, the “over-selling” of fuel stocks, long-time management vacancies and slow decision-making.

Petro SA, meanwhile, is continuing to lose market share, and gas reserves at its biggest subsidiary are expected to run out in 2020.

RAF – bank accounts attached

The Road Accident Fund is facing a financial crisis and was unable to pay salaries at the start of December as its banking accounts have been attached.

The fund – which pays compensation to South Africans who suffered losses due to road accidents – currently owes over R17 billion in compensation to people across the country.

Despite these issues, the RAF has been successful in securing support from government its latest annual report shows (2018/2019). In the financial year under review the increased fuel levy contributed an additional R6 billion to the fund’s coffers.

During the 2019/20 Budget Speech in February 2019 an additional 5 c/l for the RAF Fuel Levy was announced by the minister of finance, effective from 1 April 2019. This increased the levy to 198 c/l and is estimated to have added an additional R800 million to the Fund’s income in the 2019/20 financial year.

The RAF said that while it is grateful for the financial assistance provided for in the budget, it is not sufficient to match the Fund’s R272 billion actuarial claims liability.

Read: Auditor General casts doubt on the future of South Africa’s state-owned entities

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Eskom, SAA, SAPO and all the other state companies the South African government has run into the ground